Divestment and Arctic Development, Between Drilling and the Deep Blue Sea

“Unlike most of the planet, the Arctic still contains uncharted mysteries,” a recent Bloomberg article quoted Scott Minerd of Guggenheim Partners LLC as saying.

The statement is no doubt true. The Arctic is among the last pristine wildernesses on the planet. There are elements of the global influence of its climate and the local details of its ecosystems and geology that science has not yet attempted to record, let alone understand. But Minerd was being loose with the language—by ‘uncharted’ he meant ‘unexploited’, and by ‘mysteries’ he meant ‘resources’. His investment management fund is looking at investing in heavy industry in the Arctic region.

Guggenheim Capital Partners is not the only investor interested in exploiting the Arctic. A 2012 report from Lloyd’s of London identifies around $US 400 billion of committed and projected funds for the development of potential Arctic oil and gas projects. Four hundred billion dollars is not a spectacular sum when it comes to the oil and gas investment—Ernst & Young reports that 75 non-national oil companies representing only 9% of oil and gas reserves worldwide invested $US 540 billion in 2012 alone. Investment numbers for national oil companies, which hold 90% of reserves, were omitted. Lloyd’s numbers are quotes of preliminary estimates and crude approximations as such. The U.S. Geological Survey estimates that around 22 percent of the world’s untapped oil and gas reserves are in the Arctic. If a sizable fraction of reserve prospects for Arctic development proved exploitable, total investment would well exceed $US 400 billion.

What else could be done with this money? A timely transition to renewable energy will require at least US$ 1 trillion in investment a year. But total renewable energy investment was down by 11 percent last year to $254 billion dollars—some considerable change shy of the trillion-dollar mark. Even if $1 trillion isn’t an exact figure, it’s beyond dispute that more money is needed.

Investment in Arctic Ocean oil is an interesting analog to renewable energy investment. In the logic of the last decade, risk-adverse financial investors would flock to fossil fuels over renewable energy because with fossil fuels, they were confident of a steady return due to its low risk profile and steady returns.

But Arctic Ocean oil turns that argument on its head. Early this year, after spending $US 6 billion dollars and not drilling a single well, Shell announced that it was suspending its operations for drilling in the Arctic for fear that the investments were damaging its bottom line.

Shell’s $US 6 billion dollar loss was buried in a portfolio of higher return projects so their shareholders, while affected by the loss, did not feel the bite in the way they might have were they taking a stake in an Arctic-only private equity fund as Guggenheim Partners is considering doing. Renewable projects, due to uncertain regulation and comparatively newer technology, are considered a risk. But average returns on renewables, in the low single digits, are better than Shell’s Arctic Ocean prospect that, on account of regulatory issues, legal hang-ups and technology immaturity has until now offered only negative yields. When risk capital is the rasion d’etre for investment, it is worth asking why, when given a choice, one would invested in destroying the environment rather than preserving it?

But returns are not the end of the story, even though it is easy to get lulled into thinking of them that way. Yesterday evening, Harvard students blockaded the office of the University President Drew Faust in protest of the University’s decision not to withdraw the endowment’s investments in fossil fuels. This morning, a number of them were arrested. In a statement to the Harvard Community written last October, Faust stated that, ‘The endowment is a resource, not a tool to impel social or political change.” In so writing, Faust perhaps unwittingly, invoked the backward view of finance that recently resulted in the Great Recession by way of robbing a line from Machiavelli’s playbook— In actions of all men, especially princes, where there is no recourse to justice, the end is all that counts.

The purpose of debt and equity finance is to facilitate capital accumulation, which in turn defines the structure of the society in which it exists. Returns are fees, the project is the purpose. In a healthy financial system, financers are mere middlemen. The great disasters of modern finance, including the 2008 financial crisis, were a symptom of a financial sector that came to conceive of returns as the purpose and, in the most recent crises, deliberately created ways of divorcing those returns from the projects that they intermediated with catastrophic consequences. While it is true that investors evaluate projects on the basis of returns, it simply incorrect to imply that the decision to stop or go ahead with projects will not have social or political consequences. The ends are a resource, but the means of getting them shapes the world.

Sieren Ernst is the co-founder and CEO of the Climate Cost Project, a data and documentary non-profit focused on bringing to light the immediate costs of climate change to American communities. She is also an environmental consultant in climate policy and investment analysis. Sieren has degrees in economics and history from Northwestern University and speaks Spanish and Mandarin Chinese.